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S&P Bullish on Big Energy ETF

After a decent start to the year, some energy stocks and
equity-based
ETFs
have come under pressure on news of the Federal Reserve's plans
to perhaps taper its quantitative easing program as soon as later
this year.

"One way to hedge against that uncertainty in the energy
sector, or perhaps reduce the risk of that uncertainty, is with
size," said S&P Capital IQ in a new research note. "Bigger
energy companies that are in more places have less risk tied up
in any one project, should it fail (e.g., drilling a dry hole).
Bigger energy companies that play at both ends of the energy food
chain are less exposed to dramatic rises or collapses in energy
prices. Finally, bigger energy companies face less regulatory
risk. If faced with higher royalties on oil and gas production in
a frontier market, a bigger oil company can shift more of its
focus to other markets."

Along those lines, S&P Capital IQ has five-star ratings on
Dow components Exxon Mobil (NYSE:
XOM
) and Chevron (NYSE:
CVX
), the two largest U.S. oil companies. At the start of trading
Monday, shares of Exxon were 4.8 percent year-to-date while
Chevron was higher by 11.7 percent.

"Both have strong portfolios of upstream projects, and both
have downstream operations that should benefit from historically
high refining margins. To the extent that investors might be
interested in the supermajors, but as part of a portfolio that
includes other areas in the oil patch such as oil and gas
equipment and services, an ETF might be worth reviewing," said
S&P Capital IQ in the note.

Finding an ETF that features large weights to Exxon and
Chevron is not difficult, but S&P notes its universe of
Overweight-rated energy funds is just 12 compared to 40 total
ETFs tracking the sector. Screening for ETFs that earn Overweight
ratings in terms of cost and performance and that have over $1
billion in assets under management pares the list of choices down
to three. One of those funds is the Vanguard Energy ETF (NYSE:
VDE
).

VDE is not the largest energy ETF by assets. That honor goes
to the rival Energy Select Sector SPDR (NYSE:
XLE
), but VDE is cheaper than XLE with annual expense ratio of 0.14
percent. That fee makes VDE less expensive than 91 percent of
comparable funds,
according to Vanguard
.

At the end of the first quarter, Exxon and Chevron combined
for 35.6 percent of VDE's weight. Schlumberger (NYSE:
SLB
), the world's largest oilfield services provider, was the ETF's
third-largest stock with a weight of 5.7 percent while
ConocoPhillips (NYSE:
COP
) was the only other member of VDE's 169-stock lineup to receive
an allocation of at least four percent. Other top-10 holdings
include Occidental Petroleum (NYSE:
OXY
) and Anadarko Petroleum (NYSE:
APC
).

"VDE scores favorably on the S&P Capital IQ Quality
Ranking, as well as for its Standard & Poor's Credit Rating
(which is derived independently of S&P Capital IQ), although
its Qualitative Risk Assessment is unfavorable, which we view as
par for the course in Energy investing. The overall score on
Risk-related parameters is Marketweight. Finally, as mentioned
earlier, VDE scores an Overweight on its Cost parameters, led by
its low expense ratio," said S&P.

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